JPMorgan US Research Enhanced Equity A JDEAX

JPMorgan US Research Enhanced Equity has seen some analyst turnover, and its process results in a portfolio quite similar to its index. The fund receives a Morningstar Analyst Rating of Neutral across all share classes.

A seasoned group of investors drives this strategy, though increased turnover in recent years gives pause. Raffaele Zingone, who has comanaged this strategy since 2002 and became the lead manager in late 2016, has spent his entire three-decade career at JPMorgan. The 24-person analyst team averages 21 years of industry experience and 11 years at the firm. However, the team saw four analysts leave over the trailing 12 months through August 2022, its highest turnover in the past five years. This attrition follows several years of analyst departures across sectors. Encouragingly, the team has hired analysts to maintain coverage, and its coverage transitions have mostly been well thought out.

The fund’s process features tight guardrails around its prospectus benchmark, the S&P 500. The analysts project earnings for each stock under their coverage, then a quantitative model ranks the names by expected returns within each sector. Zingone uses the top picks to construct the portfolio, with the goal of offering shareholders a modestly higher risk-adjusted return versus the S&P 500. He keeps the strategy's annualized tracking error (the standard deviation of its excess returns) to 1.5% and maintains tight adherence to the index’s sector weights. Individual positions cannot deviate more than 1 percentage point from the index’s. These narrow constraints mean that stock-picking drives the fund’s returns, but they also limit the portfolio's distinctiveness; as of July 2022, the portfolio's active share (a measure of differentiation in names and weights from a benchmark) was just 36%.

So far, the strategy has delivered on its promise to edge past its benchmark after fees. Over Zingone’s tenure from November 2016 through August 2022, the institutional shares’ 13.8% annualized return outpaced the S&P 500 and its Morningstar Category index (the Russell 1000 Index) by 46 and 75 basis points, respectively. Stellar performance in 2020 and 2021 helped make up for the fund’s underperformance in prior years.

This strategy’s tight constraints around the benchmark essentially cap the fund’s potential to outperform it. The Process rating remains at Average.

Lead manager Raffaele Zingone leverages JPMorgan's central analyst team to construct the fund’s approximately 200-stock portfolio. Sector specialists forecast earnings eight years out for 600-plus companies and incorporate those forecasts into their valuations, which are then used to rank names under coverage in each sector. Zingone uses a quant model that considers analysts' valuations, firm-specific growth catalysts, and confidence in long-term trends to highlight the most attractive firms.

Zingone then constructs a portfolio within relatively strict limits. He keeps the strategy's tracking-error target to 1.5% versus the S&P 500, the portfolio's supersectors (finance, technology, healthcare, consumer, and industrials/commodities) within 0.2 percentage points of the index, and individual positions within 1 percentage point. Such narrow sector constraints mean that stock-picking, rather than sector allocations, will drive returns, but it can also limit the portfolio's distinctiveness.

Sticking to these tight constraints could spur portfolio turnover, but Zingone has kept trading reasonable. Over the past five calendar years through 2021, turnover averaged 44.2% versus the typical large-blend Morningstar Category peer's 72.4%.

The combination of bottom-up research and tight constraints leads to a slightly concentrated yet benchmarklike portfolio. The number of holdings has stayed under 200, significantly lower than that of the benchmark and the team’s self-imposed limit of 300. However, the strategy tends to stay factor- and sector-neutral relative to the S&P 500, and tracking error has averaged at 1.1% over Zingone’s tenure through August 2022. Individual holdings must stay within 1 percentage point of the bogy’s weights, but most stay much closer: The portfolio’s average active bet size as of July 2022 was just 0.2 percentage points. The team’s largest active weight that month was its 6.9% allocation to Microsoft MSFT, 89 basis points greater than the benchmark’s share, but the next largest overweighting was Wells Fargo & Company WFC, whose allocation was only 60 basis points more than benchmark’s share. The portfolio tends to have low active share (a measure of differentiation in names and weights from an index); in July 2022, it was just 36%.

The team prudently includes out-of-benchmark names but with mixed results. These stocks can come from analysts’ coverage or portfolio managers’ side work, and they tend to be mid- or large-cap companies. As of July 2022, the portfolio contained 18 such names. Names like Cheniere Energy LNG contributed to the portfolio in the trailing year, whereas others like Shopify SHOP and Workday WDAY came in as some of the largest detractors.

An experienced group drives this strategy, but continued analyst turnover keeps the People rating at Average.

Both the analyst group and lead manager Raffaele Zingone boast long tenures and industry experience. Though Zingone became the lead manager in November 2016, he has comanaged this strategy since 2002. Throughout his career at JPMorgan starting from 1991, he has managed a handful of other U.S. equity offerings as well. A group of 24 seasoned analysts supports Zingone here. The analysts, who average 21 years of industry experience and 11 years at the firm, provide most of the stock-specific research for this strategy’s roughly 600-stock universe. Though Zingone has the final say on portfolio construction, he expects the analysts’ fundamental research to be the primary driver of alpha on this strategy.

Having said that, turnover within the analyst bench gives us pause. The group has seen attrition across sectors, including two healthcare analysts and two industrials analysts over the trailing year through August 2022. This follows the departure of several other analysts in the consumer, financials, energy, and REITs sectors from 2019 to 2021. The team has been hiring to fill in the coverage gaps, and transitions have mostly been well executed, but increased stability would help bolster our confidence in the team.

A well-resourced, thoughtful, and disciplined steward of client assets, JPMorgan Asset Management maintains an Above Average Parent rating.

As of 2022, this investment stalwart manages more than USD 2.5 trillion in AUM. Composed of various cohorts globally and a diverse set of asset classes, the firm has more tightly integrated its capabilities in recent years, notably through the development of proprietary analytical and risk systems. Investment teams are robustly staffed and helmed by seasoned contributors. The firm’s strategies tend to produce reliable portfolios, and several flagship offerings are Morningstar Medalists. Manager incentives align with fundholders'; compensation reflects longer-term performance factors, and portfolio managers invest in the firm’s strategies as part of their compensation plans.

The firm’s funds tend to be well-priced, but they aren’t as competitive as many highly regarded peers of similar scale. Recent product launches include thematic and single-country strategies, both of which carry the potential for volatile performance and flows, along with misuse by investors. The firm remains intrepid when it comes to developing an environmental, social, and governance-focused framework and continues to move into other areas such as direct indexing through its 55iP acquisition and China through its joint venture, but these complicated initiatives take time to assess any real and lasting effect.

Since its rebranding in 2016, the strategy has delivered what it promised. From November 2016 through August 2021, the institutional shares gained 13.8% annualized, outpacing the S&P 500 and its category index (the Russell 1000 Index) by 46 and 75 basis points, respectively. Even on a risk-adjusted basis (as measured by Sharpe ratio), the strategy surpassed both its peers and benchmark and landed in the top decile of the large-blend category. Stellar performance in 2020 and 2021 accounts for the lion’s share of the strategy’s excess returns. The fund had underperformed the S&P 500 by varying margins from 2016 to 2019, but it made ground on its bogy in the following couple of years, outstripping the index by 227 basis points in 2020 and 182 basis points in 2021.

The strategy has fared relatively well in 2022 to date. During the market downturn in the first quarter, the fund experienced a shallower drawdown than its peers and benchmark, losing 4.4% compared with an average peer’s 5.2%. The fund’s 15.8% loss through August 2022 puts the fund above the S&P 500 and its average category peer, both of which lost 16.1%. Trailing one-year attribution as of July 2022 shows strong stock picks from the healthcare sector, including AbbVie ABBV, and UnitedHealth Group UNH. On the other hand, the industrials sector had some of the largest detractors such as Stanley Black & Decker SWK and Trane Technologies TT.

It’s critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category’s second-cheapest quintile. Even so, based on our assessment of the fund’s People, Process and Parent pillars in the context of these fees, we don’t think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Neutral.